United Airlines Holdings, Inc. (UAL) Earnings Call Transcript & Summary

Hey, everybody. Good afternoon and -- or good morning, depending where you are, and thank you so much for joining us. I'm Hunter Keay. I'm the airline and aerospace analyst here at Wolfe Research. It is 1:00 Eastern Time on May 25. This is the United Airlines fireside chat with Scott Kirby, the CEO; Kristina Munoz, you're on camera. Good to see you, too. And then, Scott, thank you so much for joining us. It's a busy day for you. I really appreciate you making the time. It's always good to see you and talk to you, man. We have 30 minutes. I'll just say type in your questions, please. Only I can see them. Don't worry, Scott, I'll weed out the bad ones. And then just type them in.

Good thing about being virtual is I'm going to say, what happened to the connection? Are we there?

Yes exactly. That's right. And then -- so type in your questions, and I'll ask them and then I've got a few of my own, but -- and then before we do that, Scott, I'll turn it over to you if you want to give a few remarks. You filed an investor update, if you want to talk about that, and then anything else you want to say, we'll get into it. So thank you, man. Appreciate you taking the time.

Kristina, do you want to start it?

Yes. Definitely. Thanks, Scott. The remarks made during this conference call may contain forward-looking statements, which represent the company's current expectations or beliefs concerning future events and financial performance. All forward-looking statements are based upon information currently available to the company. And now back to you, Scott.

All right. Well, I guess I'll start it quick and short by saying I feel really good about what we've accomplished in the last 1.5 years going through the pandemic. We were pretty unfortunately accurate about what the depth of and length of the crisis was going to be. But that served us well in being prepared and minimizing cash burn. And I kind of -- I do keep track of what happens across the whole industry and have been -- well, first, we had the hardest hand of cards to play in the pandemic because of the largest international exposure, largest business market exposure. And pretty consistently, we've been in the top 1 or 2 airlines in terms of cash burn if you adjust it by size, and we were measuring that kind of all the financial metrics. We aren't through the end of the tunnel yet, but we clearly see the light at the end of the tunnel. Domestic -- leisure demand is back at more than 100%. Business demand starting to ramp up a couple of weeks ago when the CDC changed the mass guidance. That was another inflection point. We see business traffic start to come back after that. You can feel the sentiment mood change in the country. It's good to be back in an office, but I'm going to miss my family. It's nice to be back around coworkers. That's happening everywhere. I suspect by the time we're in September, we're going to see a big ramp-up in business traffic across the country. And you can just read the newspaper, more and more opening borders around the world. And so while we don't know the exact timing when all that will ultimately come to a fruition, we're clearly on the path and the road to recovery. I think demand will be back at 100%. We can talk about that, I'm sure, at some point. And I think the international market, in particular, is going to look a whole lot better a year or 2 from now than the domestic market because it's [indiscernible] structural changes that have happened. And so we couldn't be more excited about what's going on at United, the improvement in customer satisfaction scores, culture change really kind of across the board at United. We're feeling good and ready to go.

That's great. Thanks for that intro. It's good to hear the enthusiasm again from you. And you did mention in the investor update today, Scott, and you just said it right now, business travel bookings are starting to recover. How are you measuring that? Are you talking these are bookings through GDS channels? Or are these just kind of closed-in bookings that are carrying higher-than-expected shares?

Well, I look at both GDS, and we've got some other metrics that we use for business travel. That are less relevant today, mostly because it's just -- there's a lot more leisure travel. It's booking closed in as well. But closed-in, traveling during the midweek, not over a weekend. But anyway, we kind of cut that data. I would say, it was down the way we look at it, down 80%. Last week, it was down 75%, which may not sound that big but mathematically, that's a 25% improvement in just a few weeks. It's pretty impressive. I think we'll continue to see that improvement through the summer. By the time we get to the end of the summer, I think there will be an inflection point where even the second derivative starts to turn positive on bookings as people are back in the office towers. And I've done a bunch of calls in the last few months with other -- CEOs of other companies and do a lot of these pre-events where you're on a panel together, and kind of consistently they say the same thing. We're going to have people back in the office when school start. So beginning of September post Labor Day, back in school, or back -- and expect to be back on the road. It's really been gratifying to like talk to people, other CEOs and other business people throughout the crisis and listen to their evolving views on business travel. I doubt most of them realize their views have even evolved, but they're evolving views from -- Zoom works great to we got to get back to see our clients and we got to get our culture back. And so it's just -- all of it is really encouraging for the future.

Yes. Okay. That's helpful. Let me just ask you, what if business travel only recovers 80% -- to down 20% or 80% of what it was before? Obviously, I mean, nominal growth that occurs on top of that 80% does come back. Are you contingency planning for these scenarios? And when will you know? Is it by, hey, it's 2023, and it doesn't happen yet. It's probably not going to happen. Like, when is that date where you kind of know where you've maybe sort of plateaued out?

So first, on flexibility. We've got 275 airplanes coming up in the next, I guess, like 3, maybe 4 years, 3 to 4 years, that we could essentially either retire on the normal schedule or early retire. And early retire is before you get to one of the later stage, like the fourth heavy check or an engine overhaul, where it's actually P&L and NPV essentially breakeven to retire the airplane early and harvest it for parts instead of spending the money to do the overhauls on the airframe and on the engine. So we've got 275 airplanes worth of flexibility, if anything is happening, to adjust the -- well, of course, we don't think that is going to happen. We have that flexibility. And I can't tell you, for sure, sitting here today, what the trigger would be to think that business travel was not going to recover or what the exact timing would be because it depends on the circumstances. But what I would say is it was last April, where we sat in a virtual room together and had a big conversation about what do we think the future looks like. And if you listen to CNBC or CNN or anything or every other airline earnings call, they talked about business travel was going to be between 30% or 50% permanently reduced. And we talked through it and we didn't -- we disagreed because it was about human nature. And I don't think anyone thinks it's going to be down 30% to 50%. Now people say 10% to 15%. And I still think it's -- we still think it's going to be 100%, and we can talk about why if you want. But it wold have -- something would have to change that made you feel like the world was really different, and frankly, I think it's -- because I think it's about human nature, it sees some real evidence that people think this kind of interaction is just as good as going to a conference seeing each other in person, going to dinner. You can get to know people just as well virtually as you can in person, and we'd have to see some real evidence of that.

What about your tech clients in SFO? Not all industries are going to come back the same, right? Are you thinking about that? A little bit [indiscernible]. Does San Francisco need to be as big as it was pre-COVID [indiscernible] seats?

We'll say one of the curses but also one of the good things about an airline is our assets can be moved, they're portable. And if that happens, then we'll adjust. My guess is just reading the tea leaves, talking to people in San Francisco, listening to what they're saying, those are all the companies. You listen to Google, Facebook, Amazon, they're all planning to have people back in the office. So I doesn't feel like that's going to change dramatically to me. I think what is likely to happen in Silicon Valley, probably also in New York and Chicago and other places is I do think people are going to -- well, probably at United as well, be able to work not in the office as often. So half time in the office. Different companies will do different things, but -- and so I think one actually incremental source of business travel is going to be people will trade their daily 2-hour commute by car for a monthly 2-hour commute by airplane. So work for Google, live in Boise, but you got to be in the office a week at least a month. And so you fly in, stay at a hotel and work dusk to dawn in the office and then you're back in Boise or wherever you're going. And I think there are going to be more people doing that. And that effect will at least counteract any drop-off in business travel from others. Look, the other thing I would say about business travel. Increasingly, I've experienced it myself and talked to a number of people anecdotally about this, once you go back on a business trip, your desire to do more escalates significantly. We took it for granted to some degree before, and it was a hassle and it was a pain. And at least in the near term, people have missed it. They love getting those reconnections. And once you get somebody to do their first trip, then they're ready to go on their second, third, fourth trip. And they -- in a way, they fly more than they were before because they've missed it and there's pent-up demand for business travel as well.

Well, how are you going to manage the people or the loyalty program? A lot of people are going to lose status, and people work hard to get status and they try every year to keep it. And I know what you guys have done, you've got some promotional programs in there, kind of earn back points PQMs quickly or MQMs and then -- but there's still going to be a lot of people that get downgraded. And I don't just mean from platinum to gold, I mean, from golden member. How do you get those people back in the ecosystem before it's too late, before you lose them in the first place?

So I think more than -- and just about any other airline, we preserve people's -- or customers' status going through the program and giving them the chance. And as we're getting back to traveling again, we're going to kind of ease into it. For people that already had status, we're going to give them much lower hurdles than they would have had historically to come back and fly. And so I think for the most part, our -- we're going to make it where our elite travelers get the time until their companies and businesses, in particular, are back traveling before they're back at the point where they're re-earning travel, and we'll look forward to welcoming them back. And we've had good engagement with customers throughout. This I'm not going to give you what is now public data. JPMorgan Chase apparently said somehow publicly that 6% increase in the last few weeks in travel credit card -- airline travel credit card spend. So that's not necessarily United, but we're their biggest portfolio. So you can guess what's happening there. So that part, that's going well. We, in the first day of our new -- this promotion that we've had for getting people to upload their vaccine, for the sweepstakes and had over 200,000 people do that, and I think over 100,000 new credit card -- new loyalty program sign-ups. So we're feeling pretty good about the power of the loyalty program to get through this and come out on the other side.

Okay. Would you ever give them the opportunity to kind of just buy their status on a onetime basis?

There are opportunities to do that. At the highest levels, we don't give people the opportunity to do that, but at the lower 2 or 3 levels, we already do that.

Okay. Do you know what percentage of your elites are people with children under college age?

I do not. You always field these strange demographic questions.

You're the type I've got to ask that question, too. The idea is really, I mean, like how about you. I'm taking my kid to soccer practice on Tuesdays at 5:30. I never could ever have committed to doing something like that before. And now I block it off on my calendar, and I do it. And I go back online and work until 11:00 like a lunatic, but...

Yes. I breakfast [indiscernible]

You get the point?

Yes. But I also have taken my 7-year-old now on 2 business trips with me.

Yes.

So...

No. That's fair, too, actually. I just -- it's an unanswerable question, but in terms of how people's behaviors change. And I get your point, once you start doing it, it opens up again. But I do wonder, it's been 18 months of really no effect to the business travel.

Yes. It's a fair thing to think about. My guess is, and I'll tell you what my personal plan is, and I think we're going to be flavored to this is instead of being in this office tower all the time like I used to be, I'll probably be here about a week a month. I'll be on the road about a week a month, and I'll be with the family somewhere kind of half the time. And that's my -- and I think there's more people. And so that, at least for me, I'm going to probably be more air miles than it was before with that kind of equation. But I think there's a lot of other people that are going to be like that.

Yes. No, it's hard to know. Obviously, habits are going to change. But again, there's a [indiscernible] you can't go home again, which I do worry about a little bit, but yes. People also have short memories on the other side of that, too. So what would have you -- if I asked you 10 years ago, Scott, what's an opinion that you have that you feel like is never going to change. And it changed, what was that -- what would that be?

Well, at least for aviation -- and I don't know if this is my opinion as much as just kind of everyone that -- we had a collective opinion. First, we've been at America West U.S. Airways. So a decade ago, completely different kinds of network. And much more of a view that air travel was commoditized. And that was more true there. Customers that cared only about price and schedule. And there's still -- those are still 2 of the most important factors, and for some customers, they're #1 and #2, so for a lot of customers. But I am increasingly convinced that air travel doesn't have to be a commodity that there are people that choose, there are people that care. And the things that you do for the customers to make them want to fly your airline are not about spending a bunch of money on -- you need to do those kinds of things. They're not the hard product as much as all the things you do to change how customers feel when they fly. And I thought that before like that has been I'll say proven to me during the pandemic with the plenty of the changes we've made and the impact that it's had on employees, the interaction with customers and I have tons of data, I could tell you. But also the anecdotes that you hear from people of how different it is flying United. And I think increasingly, customers are going to choose to fly United compared to what they did in the past. That's -- definitely my views have certainly evolved on that point.

Yes, no me too. Do you feel like -- I think you're a pretty forward-thinking person. You're an idea guy is what you are. And -- I mean, obviously, in a good way.

[indiscernible]

Do you feel like PSP -- yes, no problem. Do you feel like PSP has hampered your ability to sort of use your idea generation to your advantage? And when PSP burns off, you've got a lot of things that you can implement a little bit more freely. I don't mean headcount reductions. That's not what I mean. But just sort of like has PSP, while helpful, sort of shackled you a little bit in terms of being able to sort of think in a differentiated manner competitively?

No. I think it's -- I think it did change where the idea opportunities were. Before PSP or even after PSP1, there were a lot of people that said PSP1, this is over, we get to end of the -- even end of the worst possible scenario. I didn't think it was enough. I can remember talking to our Board and saying, based on our forecast, here's everything that we're going to do to make sure we get through it. But those who think it's over, if our forecast is right, which it turned out to be pretty close to right, the others aren't going to make it through, unless there's another PSP. And that would have driven kind of much harder capacity-focused decisions one way or another. And so the capacity-focused decisions didn't happen. But the flip side of that is we have more, I think, opportunity when you look back sort of a few years from now, and you look at -- whether you look at CASM X or you look at the amount of headcount at airlines per unit ASM aircraft departures, whatever you want to look at, United is going to have done more to change and it's going to lead on all those metrics. I'm happy if you are going to look back 5 years from now and I think United is -- or 3 years from now and 5 years now, I think United is going to have the highest margins certainly than many of the big airlines domestically. And you're going to look -- and the reason is going to be because of real changes that we've made -- not like early retire airplanes and take 0 depreciation kind of stuff. But the real changes that we've implemented that are going to be permanent. We're going to operate differently on the other side. We're already doing that today, and we're going to operate differently and there are things that we implemented that no one else did. We don't talk about them a lot publicly, and I'm not going to talk about them all today because I don't want others to copy them. But there are things that we did with technology and just stopping doing stuff that if you were starting an airline from scratch and you told somebody, here's your job, but we're not going to tell you how the person before you did it. You'd never -- there's all kinds of work and reporting and things that you'd never do. And I think we've made more real structural change. I bet we're the only airline 5 years from now that's going to have the same level of management M&A spend of any airline. We're going to have dramatically increased the efficiency of frontline -- the productivity of frontline employees and that's going to be the differentiator for United. And those are things that, back to PSP, might have happened at other airlines if they had to make the changes. If survival had been at stake, they would have had to make some of those changes. But because survival wasn't at stake, those things are too hard to do and so didn't get done, but we did them anyway. So I think PSP switched the creativity from what's going to happen with -- or the ideation from what's going to happen with the capacity and the network to what are you going to do to run the airline more efficiently and to change the culture of the airline.

So as I think about this EBITDA margin guide that you gave in 2023, that's basically why you feel good about it is because you expect the narrative of United over the next 3 years to be a cost narrative. You expect this to be a consistent CASM. CASM after CASM after CASM type story.

Yes. And that's the one I can certain -- I can have more certainty of and more control over. I think on the revenue side, we'll have to wait and see how some of these open questions play out. But what it's worth, I think United is probably set up to be a RASM outperformer as well just because of the international exposure -- our larger international exposure, if nothing else. And but -- I know what the CASM numbers are. And I'm increasingly confident at just saying no to adding expenses, and we seem to figure it out. And that's something in my chair I can do. And it's worked well, and we've got a great team and -- what we have to do is keep the culture that we created going through the pandemic, and we have to do this stuff to survive. And now we can just talk about we have to do this stuff, not just because survival is at stake, but because this is the way to make this the best airline in the world. And we're going to do it.

Well, then to that, you guys were supposed to spend $7 billion in CapEx in 2020, and you spent $3.5 billion. Where is the other $3.5 billion going to show up? I mean, are you going to be spending $9 billion in 2024? Or is this CapEx that you're able to delete somehow as a function of just -- when you say cutting cost, you can talk CASM all day long, but there's also CapEx, too. Where did those $3.5 billion go?

So CapEx is -- I'll put it into 2 buckets, kind of the $1.5 billion to $2 billion that we spent on non-aircraft CapEx. And my guess is that's going to stay kind of steady state. And those are the kind of things that -- it's more -- it's easier to go identify the payback IT projects such that or airport projects that you essentially have to do, maintenance CapEx that you have to do. That's going to kind of be steady state always. And then the rest of it is aircraft. And if I was modeling an airline, I think of instead of trying to do year-to-year, what's happening this year, what's happening next year, I kind of think of it as aircraft 25-year life, so whatever your total aircraft value is, 4% a year as you're steady -- you have waves up and down depending on where you are in the replacement cycle, but kind of 4% a year is normal airline CapEx for replacement and then any growth aircraft are on top of that. And so our total CapEx. Some of that from 2020 is clearly deferrals that aircraft -- mostly aircraft that gets deferred to some point later. But instead of trying to model each and every year and the delivery schedule slips by a month and people are saying, "Oh, this is great for 2021. I know this is terrible for 2022." Like you should just book 4% a year-end, and then growth aircraft on top of that is the simple way I at least think about it. And that will be to United as well.

Okay. Okay. The other question that just came in from the audience. How is Scott thinking about marginal cost flying/protecting hubs? Has your stance changed on this at all?

Well, I don't know if my stance has changed. I guess the answer is no. The reality is that we've done a lot of work as we went through the pandemic on our marginal costs. And for us, a narrow-body -- a large narrow-body airplane comes in at a sub $0.06 CASM. And just think about it, it's just rational. If you're comparing us to a low-cost carrier, like we probably spend less purchasing the airplane than they do. We spend the same on landing fees, fuel. On maintenance, in the real world, we spend less. They do a different way to capitalize maintenance. So their P&L expense is less but their real expense is less than ours. Our new hire employees get paid about the same. So the seniority effect is the same. Really, kind of -- if I kind of go through all of the cost buckets, the only place -- particularly as long as we don't let management fixed headcount grow, which a lot of network carriers have done in the past. If you don't do that, which we will not do at United Airlines, the only difference in CASM for a low-cost carrier and us is the number of seats we've crammed on the airplane. And yes, we've crammed a lot more seats on the airplane. And so the denominator is big. The total dollar is probably a little bit higher, not a lot, but probably a little bit higher for an incremental airplane, divided by a bigger denominator, but we generate a far higher RASM premium than that CASM differential that they get. And so I think we're the low-cost producer of aircraft, particularly in our hubs, and we generate the highest RASM.

Yes. Okay. Well, what about simplifying the product a little bit? You've got basic economy. You all have players on the other end with a few options in between. Do you need these different sort of -- I know they're all revenue management tools effectively, but some of them are actually hard products. Do you need this type of complexity in the system -- in the business at this point?

Those don't really drive cost per se. I mean, it changes the number of ASMs, putting a Polaris seat is going to cost more to fly a mile than a seat at 28-inch pitch. Flying it from San Francisco to Singapore is different than flying it from Akron to Orlando. But they don't really drive cost complexity. If people think that, that's a misnomer. They drive brand complexity, and I worry about that. And what we stand for to customers and expectations to customers. But it's not a cost issue. If it is, it's enough -- it's far enough after the decimal point that is not a rounding error for any numbers that we ever talk about. But it is a brand challenge and complexity challenge.

Yes. That was the nature of the question, actually. What about -- I mean, when you think about loyalty and the concept of complexity, is there a way to simplify pricing structures to whether or not it's so dynamic and volatile? Volatile pricing is one reason why customers, I think, don't trust airlines very much. Is there anything you can do with that?

We've started trying to do -- I mean getting to permanently eliminate change fees was a step in trying to make things feel fair or more fair to customers. I'm not sure that we ever really get away from pricing segmentation. It's hard for me to imagine that we do. It happens not just in our -- in any industry with this [ falling ] product, this is what happens because you want to offer lower fares on those off-peak periods. And the Sunday after Thanksgiving, you need the prices to be higher. Otherwise, you'll just sell out months in advance and then disappoint a lot of customers who can't get on the airplane. So my guess is pricing segmentation stays a function of the market. But changing to me, it's about changing how customers feel about flying getting no change fees. Our ConnectionSaver program, which [indiscernible] huge interest to most investors. Those are all things -- those are things designed to try to do the right thing for customers and to convince our employees that we want that they're empowered to do the right. And if you're a gate agent and you spent your career being told to slam the door in the face of people that are connecting, and they show up at the gate like, I see the airplane right there, just let me on. And you're forced to say them no. And then your leadership team tells you do you want to do the right thing for the customers, you think they're full of it because they are full of it if they don't back it up with words. So those are all things designed to change how customers feel when they fly United. Look, Southwest does an amazing job. I think it's -- their #1 attribute is people trust them and feel like Southwest cares and is going to do the right thing. Imagine what a network care, if you can get customers to trust you and feel like that, it's harder for us to do. But imagine what the power of our loyalty program, our networks, our -- all of that, you can overcome that hurdle, what it can mean.

Yes. All right. 2 more quick ones for you because then I will let you go. I know you got another meeting. But if I were to look at your expense on the P&L by expense category into '22 or '23, which line items do you feel like have the best prospects of being lower on a unit cost basis than 2018, 2019 combined?

Okay. Well, I don't -- I'll say our -- how we report our M&A, headcount, fixed overhead expenses is absolutely going to get lower. And also our total labor expense is going to get lower, not because of pay rates, those are going to continue to go up. But because we're -- we've just done so much with technology to be more productive and the way of work. And look, it's one of the benefits of the pandemic. Those were things that we were like talking about, thinking about. Some of them weren't, but some of them we were. But they were going to take a decade to overcome all the resistance to change. And we just did it in the pandemic. And now we're just never going to go back the way we did it before.

Okay. And then last one for you. I'm asking everyone this question. So on a scale of 1 to 10, 10 being very concerned, 1 being not concerned, how concerned are you about inflation over the next year or 2?

1.

Okay.

I mean, I think we're going to have inflation, but I think it's partly going to be -- air fares are going to be a contributor to that inflation. So we'll more than pass it on.

Got you. Well, look, man, it's great to see you. It's good to see you. We're both back in the office, which is great. So give everyone the best over there.

Yes.

I just got here on Thursday, actually, but I got my conference cut. So anyway, look, I appreciate you taking the time. It's great to see you, and I'll see you in person at some point soon.

Yes, I look forward to it. Bye everyone.

Thanks. Bye, Scott. See you later.